Cement manufacturers are consolidating and posting strong profits, but their successes are leaving regional contractors often dependent on only one or two suppliers, says the Federal Trade Commission. And that tends to create pricing power for the producers.
A late May settlement between the agency and Europe-based cement giants Holcim Ltd. and Lafarge SA allowed the companies to proceed with a merger announced last year that is set to create the world's largest cement manufacturer. It will have operations in 90 countries and capacity to produce 427 million tonnes of cement, roughly 15% of global demand. As a condition for transaction, the FTC demanded a divestiture of the companies' North American assets to protect regional markets from cement monopolies. The agency said cement markets in 12 states would be jeopardized by the merger.
The effects of the deal and ordered divestiture are still playing out. Use of U.S. concrete capacity has yet to break 80%, so contractors and other cement consumers should not be suffering from supply constraints, says Ed Sullivan, chief economist for the Portland Cement Association. The trouble is that cement doesn't trade nationally, which means single firms can potentially control production and price in a local market. "In Ontario, there are a lot of concrete mixers, but they can only get powder and aggregate from one distribution center," says Tony Mollica, business manager for cement masons' union Local 598, in Woodbridge, Ontario. Lafarge has dominated the regional market, he says. The company now seeks a buyer for its Mississauga, Ontario, plant, FTC says.
Along with the Holcim-Lafarge deal, a flurry of mergers and acquisitions has put top firms in a position to potentially dominate regional demand. Set to close in July is a $450-million purchase by Missouri-based Summit Materials Inc. of a Davenport, Iowa, cement plant and a series of mix terminals from LaFarge. Summit, which is controlled by investment firm Blackstone Group, pushed through an initial public offering in March at a buy-in price of $18 per share. The stock closed at $25.24 on June 30.
Other firms that made acquisitions in the last 12 to 18 months are seeing similar gains. Martin Marietta bought Texas Industries for $3 billion in 2014 and is looking at an earnings-per-share growth rate of 45%, says Jim Barrett, cement sector analyst at C.L. King Associates.
"If you gobble up a competitor that offered a discount to your product, then yes, that's going to increase your pricing power," adds Barrett. "FTC's [finding] that the merger of only two companies would affect 12 states—that would suggest that there are significant supply constraints."
Vulcan Materials bought five aggregate facilities, none from Holcim, in the southwest and on the East Coast last year. Vulcan reported that total profits increased 128% to $78 million during the first quarter. Eagle Materials, acting on the Holcim-Lafarge divestiture settlement, bought a Chicago granulated slag plant from Holcim in March.